By Zulon Begum and Wendy Chung (CM Murray LLP)
The COVID-19 pandemic has forced IFAs to adapt to a seismic change in working practices and evaluate the way that they provide services to their clients. Whilst many IFAs are planning their operational needs for the “Next Normal”, they are (or should be) also assessing the effectiveness of their ownership and management structure for the future.
Many IFAs operate through a private limited company but most professional practices (such as firms of accountants and lawyers) favour the limited liability partnership (LLP). LLPs are a hybrid between a partnership and a private limited company, which brings with it the advantages and disadvantages of an LLP and a company. IFAs that desire flexible and agile decision-making in the Next Normal may find the LLP to be an attractive alternative structure for the future.
Freedom and flexibility
LLPs are usually governed by a contract between the members of the LLP (who may be a group of individuals and/or corporate entities).
The members of the LLP are generally free to agree amongst themselves how they want the business to be owned and managed. In particular, they are free to decide:
- Whether and how much capital is to be contributed to the LLP
- How profits are to be shared between the members of the LLP
- Who and how decisions are to be made by the LLP
- Who, how and when members can join and leave the LLP
- What obligations and benefits are to apply to the members of the LLP
In comparison, the governance and decision-making of a company is mostly governed by legislation. For example, the company is managed by its directors, who are required to comply with a list of duties to the company, its members and other stakeholders and there are restrictions and procedures in relation to maintenance of its capital.
Less legislative restrictions on LLPs usually gives them an advantage in being able to respond to opportunities and threats relatively swiftly and easily (often by the agreement of a specified majority of the LLP’s members or a smaller group of members who act as the LLP’s management board).
Potential tax advantage
LLPs are treated as a partnership rather than a company when it comes to taxation. LLPs and partnerships are “tax transparent”, which means that each individual member of the LLP is taxed on their share of the profits of the partnership as though they are each a self-employed individual. The LLP itself does not pay any tax and both the LLP and its members do not pay any national insurance in respect of the income received by the members.
In comparison, the profits of a company are taxed at the corporation tax rate and its senior owners and managers pay income tax, employee national insurance and dividend tax as directors and shareholders. The company also pays employers’ national insurance in respect of its directors’ remuneration.
However, under the salaried member tax rules, some members of an LLP are at risk of being taxed as an employee even though they are members of the LLP under partnership law. Salaried members and the LLP will both be required to pay national insurance contributions in respect of the salaried member’s profit share.
